The Swiss are known to value their independence. They don’t use the Euro currency despite being sandwiched between France and Germany, and they never officially picked sides in the World Wars for fear of tying their wagon too closely to one geopolitical regime over the other. 

That’s why we give the name the Switzerland Structure to a business model that is set up to be free of a reliance on a key customer, employee, or supplier. 

You probably already know that a customer or employee dependency can undermine the value of your business, but have you ever stopped to think how one of your suppliers could also lead to a valuation drop?

Acquirers want to invest in businesses that inoculate themselves against danger and being dependent on a supplier can be a risk. 

The $4 Million Haircut

In 1994 Robert Hartline started selling phones in the back of his car. By 2019 he had built Absolute Wireless into a chain of 56 wireless stores and 350 employees. He had two main carriers that supplied him with the bulk of his data plans.

Hartline was able to systematize his business while he grew by creating employee onboarding videos and delegating key processes for his new employees to follow. 

The business was a success, and Hartline was riding high up until early 2020. The pandemic hit, and two of his wireless carriers merged, leaving Hartline’s business spinning out of control.  

One carrier assumed the dominant position in the marketplace and promptly delisted its legacy dealers from their Google search listings. Panicked by the abrupt change of posture from his wireless carrier, Hartline decided to sell to another dealer, who was on better terms with the now dominant carrier. 

Hartline agreed to an acquisition offer, but as diligence progressed, the carrier insisted Hartline drop 10 of his stores. Hartline’s acquirer promptly dropped the acquisition offer by $4 million. Frustrated but still happy to get out, Hartline agreed to the lower number only to be told the acquirer was not prepared to pay cash and that he would be asked to finance almost half of their acquisition over time. 

Hartline has gone on to create successful businesses since his experience with Absolute Wireless and now prefers software businesses, which are not beholden to a major supplier. 

If you find yourself too dependent on a supplier, make sure you invest in your customer relationships so that your customer thinks of themselves when buying from you, not your supplier. Next, consider cultivating a relationship with alternative suppliers even if it costs you a point or two of margin in the short term. Over time, the diversity of suppliers will allow you to avoid the valuation discount you incur when you become too dependent on a single supplier. 

Get your score:

https://score.valuebuildersystem.com/provengain/paul-wildrick

If your goal is to build a more valuable company, stop selling your time. 

Billing by the hour or day means customers are renting your time rather than buying a result, which means that your business model lacks leverage. To grow, you need to either work harder or hire more people. Since it can take months to ramp up new employees, fast growth is just about impossible.

One of the eight factors that acquirers look for in the businesses they invest in is your company’s Growth Potential. Simply put, they want to know how fast they could grow your business, and nothing diminishes your Growth Potential more than selling your time.

Billing by the hour can also drag down your customer’s satisfaction with your business — because customers dislike the feeling of being nickel and dimed. They know you’re incentivized to lengthen the time a project takes, while they want a solution in the shortest time. This misalignment leads to unhappy customers, which can destroy the value of your business. 

Peddling time also invites competition. When you sell your time, you allow customers to compare you with others offering the same service. This can lead to downward pricing pressure and lower margins as you become commoditized. 

How Likeable Media Stopped Selling Time

Carrie and Dave Kerpen started Likeable Media, a social media agency, in 2006. Facebook was emerging as a dominant platform, and marketers were trying to figure out how to monetize users of their platform.

The Kerpens started selling their time but quickly realized the limitations of an hourly billing model. They realized that customers didn’t want to buy their time. Instead, Likeable customers wanted to buy social content. Marketers wanted a video they could post to their Facebook feed, or a blog post they could publish on their site.

The Kerpens decided to switch from an hourly billing model to the Content Credit System. They assigned each piece of content several credits. For example, a tweet might be one credit, a written blog post might be ten, and a video might cost twenty credits. Customers signed up for an annual allotment of credits they could roll over month to month. 

The Content Credit System transformed Likeable Media for the better. To begin with, customers were no longer buying time. Instead, they were happy to pay for tangible output rather than trying to scrutinize an hourly bill. The credits also made it easier for Likeable’s Account Managers to upsell customers. They no longer needed to justify why a particular project would take more time. Instead, they suggested that customers buy more credits if they needed more content. 

The Kerpens’ innovative billing approach also created recurring revenue because The Content Credit System relied on annual contracts renewed each year. 

The Content Credit System also transformed Likeable’s cash flow because customers paid for their credits upfront.

Most importantly, the Content Credit System enabled the Kerpens to stop selling their time and build a team. By 2020, Likeable was up to more than 50 full-time employees when they caught the attention of 10Pearls, a digital strategy company which acquired Likeable Media for 8.5 times EBITDA, a healthy premium over a typical marketing agency.

The bottom line? If your goal is to grow a more valuable company, stop selling your time and start selling your customers’ results.

As a business owner, you’re likely proud of the results you’ve achieved in the past, but when it comes to the value of your business, your future is critical. That’s why your growth potential is one of eight factors that drive the value of your business.

One metric that acquirers may use to evaluate your growth potential is your revenue per employee.

Alphabet (Google’s parent company) generates around $1.3 million in revenue per employee. Compare that to the advertising agency WPP Group, whose average revenue per employee is around $100,000. For every dollar of revenue, WPP needs more than ten times the employees than Alphabet does.

It takes time to recruit, train, and motivate people, which is why WPP has grown more slowly and suffers much lower valuations when compared to a less people-heavy company.

Measuring your revenue per employee is just one of many ways an investor may evaluate how quickly they are likely to grow your company.

Looking Skyward

For an example of some of the other ways acquirers assess your growth potential, take a look at Verizon’s recent acquisition of Skyward. Jonathan Evans started Skyward in 2012 when he spotted companies like Amazon and Walmart using drones for package delivery. Evans was working as an air ambulance helicopter pilot and realized widespread use of drones would eventually create air safety issues.

Evans saw an opportunity where others hadn’t and launched Skyward to develop software that could safely route drone traffic. While he wasn’t a programmer, his extensive aviation experience enabled him to understand how the current airspace management guidelines could be turned into applications that created “digital train tracks” for drones.

Early adopters like utility, construction, and media companies used Skyward’s software to manage their drone fleets. Investors also came calling. Within a few years, Skyward had raised approximately $8 million.

One of those investors was Verizon. Drones would require fast and reliable Internet connectivity to operate safely, and the telecom giant wanted a piece of the future. Airbus came calling too, and when Verizon heard of the aerospace corporation’s interest, they leaped into action and offered to buy the company. For Evans, marrying his nascent technology to the country’s largest telecommunications giant was an ideal match.

Within days, Evans had sold Skyward to Verizon for top dollar. Investors enjoyed returns of between three and five times their original investment.

Given the growth of the industrial drone market, Verizon knew Skyward had the potential to expand quickly as significant companies started to adopt drones. Verizon also understood that as Skyward grew, so too would the customer’s need for Verizon’s data because drones rely on a data connection to communicate with the ground.

No matter what business you’re in, the critical takeaway is to remember that the value of your business is determined less by what you have done in the past and more by what you will likely do in the future.

You’ve likely heard the adage that it is far easier to cross-sell an existing customer a new product than it is to find a new customer.

And if your goal is to grow at all costs, then cross-selling makes sense. 

However, all of that sales growth may not do much for the value of your company. If you cross-sell your existing customers too much stuff, it could make your business far less valuable.

When you cross-sell a customer so many things that they begin to account for more than 15–30% of your revenue, expect your value to drop. If a single customer represents more than 30% of your sales, expect an even deeper discount.

Customer concentration is one factor that makes up your score on The Switzerland Structure — one of eight drivers the folks over at The Value Builder System™ have discovered drives your business’s value in an acquirer’s eyes.

To summarize in simplistic terms, the least valuable companies focus on selling lots of stuff to a few people. The most valuable businesses do precisely the opposite: by selling less stuff to more people.

How 3D4Medical Made the Switch 

As an example, let’s look at the medical technology firm 3D4Medical. Founded in 2004 by John Moore, the company built 3-D models of the human body, photographed them, and sold or licensed their images to textbook publishers. 

By 2010, 3D4Medical was selling images to a handful of large publishers around the world. Then the recession hit, severely impacting the entire publishing business. 

To make things worse, new generations of students increasingly wanted to learn online, rather than through textbooks. The advent of inexpensive digital photography, and the resulting increase in competition for the same customers, also didn’t help Moore. 

Moore had built a successful company on a handful of customers, but when that segment began to dry up, so did his business. Despite working harder than ever, Moore’s revenue plateaued for four straight years. Instead of punching through to the next level, Moore had his hands full just keeping his company going.

But while Moore had relied on too few customers, he still had something no one else had: thousands of 3-D models of the human body. 

Then Moore had an idea. 

He decided to re-purpose his 3-D images into a mobile app that medical students could use on their phones. Moore expanded the idea to include professors and medical professionals, who could use his 3-D images on an individual basis to learn, teach, and share with patients and students. 

By 2019, 3D4Medical had become the biggest producer of medical apps on every app store. The company boasted over 300 of the top universities in the world as clients. Their app served 1.2 million paying customers and had 25 million downloads. 

Thanks to having a diverse set of customers, Moore sold 3D4Medical in 2019 for $50.6 million. 

The takeaway? Customer concentration is seen as a significant risk when a potential buyer determines the value of your business. That’s why the most valuable companies are the ones that sell less stuff to more people.

Finally, 2020 is in the books.  

Good riddance. 

If your goal is to build a more valuable company in 2021, here are some New Year’s resolutions to consider:

  1. Stop chasing revenue. A bigger company is not necessarily a more valuable one if the extra sales come from products and services that are too reliant on you to deliver them.
  2. Start surveying your customers using the Net Promoter Score methodology. It’s a fast and easy way for your customers to give you feedback, and it’s predictive of your company’s growth in the future. 
  3. Sell less stuff to more people. The most valuable companies have a defendable niche selling a few differentiated products and services to many customers. The least valuable businesses sell lots of undifferentiated products and services to a concentrated group of buyers. 
  4. Drop the products or services that depend on you. If you offer something that needs you to produce or sell it, consider dropping it from your offerings. Services and products that require you suck up your time and cash and don’t contribute significantly to your business’s value. 
  5. Collect more money up front. Turn a negative cash flow cycle into a positive one and you boost your business’s value and lessen your stress load. 
  6. Create more recurring revenue. Predictable sales from subscriptions or recurring contracts mean less stress in the short term and a more valuable business over the long run. 
  7. Be different. Refine your marketing strategy to emphasize the point of differentiation that customers value. Be relentless in highlighting this advantage.
  8. Find a backup supplier for your most critical raw materials. Consider placing a small order to establish a commercial relationship and diversify the sources of your most-difficult-to-find materials.
  9. Teach them to fish. Answer every employee question of you with “What would you do if you owned the business?” Your goal should be to cultivate employees who think like owners so they can start answering their own questions without coming to you.
  10. Create an instruction manual. Document your most important processes so your employees can do their work independently. 

Here’s to building a more valuable company in 2021!

As we enter a new decade, it’s fun to look back on the companies that have stood the test of time. Despite a few well-financed chicken-focused start-ups, mounting pressure to reduce our dependence on meat, and our growing addiction to fancy coffee, McDonald’s has managed to thrive. This year McDonald’s is celebrating its 80th anniversary with a market capitalization of around $150 billion—up roughly 10% over last year. 

McDonald’s started when Maurice and Richard (Mac and Dick) were invited by their father, Patrick McDonald, to help flip burgers at his diner, the Airdrome, which the brothers rebranded in 1940 as their namesake. 

The two spent almost ten years tinkering with their business before they introduced the “Speedee Service System”—techniques that were pulled from the factory assembly line to serve customers quickly.

The McDonald clan ran their single-location hamburger stand for almost 20 years before Ray Kroc came along, asking to franchise the concept. Mac and Dick had the skills to create a successful one-location business, but it was Kroc who took their modest restaurant and made it world famous. 

What Got You Here Won’t Get You There

Three skills are essential to survival as a start-up that you must eventually “unlearn” to grow a business. While these talents are prerequisites for getting a business off the ground, they become a liability as time goes on.

  • Flexibility

In the early days, when cash is scarce, you need to be flexible. Instead of hiring full-time employees, you may need to subcontract work to a partner. This arrangement works well as you pay subcontractors only when you have work, and they pay their expenses.

You also stay flexible when dealing with customers. If you’re just starting up, you’re likely not in a position to dictate to your prospects, so you listen carefully and adjust as necessary to suit their needs. 

Instead of setting up a physical location, you may create a makeshift office by patching together a home office or working out of a coffee shop. 

All of this bootstrapping allows you to get your business off the ground on a shoestring budget. The problem is that being too flexible can start to become a liability. Your contract employees may have other clients and can’t be at your beck and call when you need them. Your customers may start to ask for so much customization that the only person in your company with the technical skills to fulfill their special requests is you. And, eventually, a customer will want to see where you work and may think less of you if your office is your car.

Flexibility, a prerequisite in the beginning, actually becomes a liability as you grow.

  • Thrift

If you’re self-financing your business, you have no choice but to make it profitable from day one. If it doesn’t make you money today, you don’t do it.

This discipline of getting an instant return on cash invested allows us to get a business off the ground. Still, the problem with fixating on immediate profit is that it can undermine your ability to grow.

For example, redesigning your website won’t make you more profitable this month, but it could be a necessary investment to attract larger contracts from more significant customers in the future. 

It’s true that you should never overlook profitability entirely, but it is a good idea to place an equal emphasis on top- and bottom-line results—even if the investment doesn’t pay off right away.

  • Self-reliance

With no money or people to delegate to, a new business owner gets things done on her own. Many of us grow to like the control of doing things our way and fear things might get messed up if we give them to someone else.

Since we can do every job in our company, we often just keep doing some things long after we should. But once you start generating more profit, a few extra bodies are necessary to ensure you’re managing your calendar appropriately and not wasting time. 

If you’re not self-reliant in the early days, you won’t even get a business off the ground. But at some point, your inclination to roll up your sleeves and do it yourself can be what stops you from growing.

Overall, flexibility, thrift, and self-reliance are the essential ingredients of any start-up, and for your company to become a world-beater, you somehow have to unlearn those tendencies for a new set of skills. 

As we roll into the fourth quarter of the year, you may be starting to consider your business goals for next year.

Given how 2020 has gone, maybe your primary ambition is to survive in 2021. Perhaps you’re going to create a recurring revenue stream or finally hire that general manager. Or maybe you’ve decided to start preparing for an exit.

Whatever your goals are, the most important thing you can do now is write down your plan to achieve them.   

A Revealing Study

This point was driven home recently by a study published in the British Journal of Health Psychology. The project was designed to see what impact stimuli would have on participants’ level of exercise. Researchers divided a random sample of participants into three groups.

For the first group, the researchers asked the participants to track how frequently they exercised. They were told to read a passage of an unrelated book before beginning.

For the second group, researchers wanted to measure the impact that motivation would have on their exercise levels. The second group was also asked to track their activity levels and were then told to read a book’s motivational passage that outlined the benefits of exercise for maintaining a healthy weight. 

The third group was asked to read the same motivational excerpt as the second group but had the additional task of writing down their exercise goals for the coming week. 

The Results

When the researchers sat down to analyze the results, they were surprised to find that among the motivated group (group 2), just 35% exercised once per week. That was slightly less exercise than group 1 (36%) even though they were motivated to work out.

When the researchers analyzed the third group’s exercise log, they were stunned to find that 91% of them had worked out. The only difference between groups 2 and 3 was that the third group was asked to write down their goals. That simple task seems to have almost tripled their likelihood to succeed. 

The researchers concluded that motivation alone has virtually no impact on our actions. Instead, it is motivation coupled with a written action plan of how you’re going to achieve your goals that has the most significant impact on your results. 

Food for thought as you start thinking about making 2021 your best year yet.

A new decade always comes with a slew of predictions that can be scary. Will a new superbug take hold? Will the stock market crash? Will the economy tank?

These are all excellent questions, but without a crystal ball, you can feel helpless. However, there are three practical steps you can take to inoculate yourself from whatever the coming years will bring:

Inoculation Strategy #1: Stop Trying To Time The Market

Many founders try to time the sale of their business to coincide with the peak of an economic cycle, reasoning they will get the best price for their business when the economy is booming.

While this is true in theory, when you sell your company, you need to do something with the money. Perhaps you’ll consider investing in real estate or buying stocks. Still, most investments are impacted by the same macro-economic environment your business enjoys, which means you’ll be buying into just as frothy a market.

The alternative to timing the market is to consider selling when your business meets two criteria:

First, if your company is on a winning streak, it will command a premium compared with average performers in your industry. Pick a time to sell when your revenue is growing, gross margin improving, employees are happy, and customers satisfied.

Second never sell before you have all of the information you’ll need to survive due diligence. After you agree to terms with an acquirer, they’ll need some time to verify your business is as advertised. A sophisticated buyer will look into every aspect of your operations, including your financials, customer contracts, employee agreements, the way you produce your product or service your sales and marketing approach and just about every other facet of your business.

You can’t wait until due diligence to prepare this package of information. The volume of questions will suck up too much of your time. React slowly to an acquirer’s request for information and “deal fatigue” will set in. This malaise happens when an acquirer loses interest in closing an acquisition because it is taking too long.

The way to immunize yourself against whatever the economy may be in the years ahead is to sell when you’re on a winning streak, and you have the data assembled to skate through due diligence with ease.

Inoculation Strategy #2: Pick Your Lane

The global economy has been expanding for several years, fueled by low-interest rates and optimistic consumers, which can be a dangerous time for founders. When the economy is hot, it’s tempting to expand outside of your original product and service category as customers seem to be willing to buy just about anything from you.

The problem with diversifying too broadly is that you can become less attractive to an acquirer over time. Acquirers buy what they could not quickly build on their own.  When you diversify too broadly, a buyer may pass reasoning, that it would be relatively easy to compete with your similar products or services.  They know you’ll want to get paid for all of your business, yet they may only want a small part of it.

Remember that acquirers only buy what they could not quickly build themselves, so they place a premium on buying a business with a definite competitive advantage — for example, a proven brand that consumers prefer or a protected technology innovation.

No matter what the economy has in store for the years ahead, do one thing better than anyone else, and you’ll always have a ready pool of potential acquirers for your business.

Inoculation strategy #3: Create A Vision Board

A vision board is a display of images that illustrate where you want to be in the future. Creating one by grabbing a stack of magazines and cut out pictures that appeal to you and communicate the life you want to lead.

A vision board is a compelling way to immunize yourself from the inertia that sets in once the startup years of your company are behind you. When you’re no longer struggling to find the next customer or wondering how you’ll make payroll, running a business may become less exciting. When you no longer need to draw on your creativity and problem-solving skills, one day may flow into the next, and you can become content, but perhaps not truly happy.

Think about a time when you were happiest. You were probably doing something new, perhaps in a new place with new people, learning, contributing and growing. Most owners are happiest when they are starting and growing a business, but when a company matures, it can become stifling.

The problem is, it can be challenging to leave a successful business. Your lifestyle needs are satisfied through your company, so why go? That’s where a vision board can be handy. It allows you to decipher the difference between being happy and merely content.  When you find yourself feeling comfortable but not necessarily happy, that might be the perfect time to sell – regardless of what’s happening in the economy at the time.

The value of your business comes down to a single equation: what multiple of your profit is an acquirer willing to pay for your company?

profit × multiple = value

Most owners believe the best way to improve the value of their company is to make more profit – so, they find ways to sell more and more. As experts in their industry, it’s natural that customers want to personally engage with them, which means spending more time on the phones, on the road and face-to-face to increase sales.

With this model, a company can slightly grow, but the owner’s life becomes much more difficult: customers demand more time and service, employees begin to burn out, and soon it feels like there are not enough hours in the day. Revenue flat lines, health can suffer and relationships get strained – all from working too much. Does this feel familiar?

If you’re spending too much time and effort on increasing your profit, you could find yourself diminishing the overall value of your business. The solution? Focus on driving your multiple (the other number in the equation above). Driving your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.

What Drives Your Multiple?


Differentiated Market Position

Acquirers only buy what they could not easily create, so expect to be paid more if you have close to a monopoly on what you sell and/or are one of the few companies who have been licensed to provide the specific product or service in your market.


Lots of Runway

Most founders think market share is something to strive for, but in the eyes of an acquirer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.


Recurring Revenue

An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.


Financials

The size and profitability of your company will matter to investors. So will the quality of your bookkeeping.

The You Factor

The most valuable businesses can thrive without their owners. The inverse is also true because the most valuable businesses are masters of independence.

Walk down Nashville’s Lower Broadway any night of the week, and you can hear aspiring artists belting out cover tunes from Elton John to Garth Brooks.  

In many cases, these musicians come to Nashville to be discovered but pay their rent using the tips they get by playing other people’s songs. Most are lucky to eke out a modest living while the stars they impersonate run thriving empires.

Forbes estimates [1] that Luke Bryan, country music’s highest-paid star last year, earned 52 million dollars on the back of his stadium tour and duties as an American Idol judge and Chevy spokesperson. 

What’s going on here? Is Bryan that much more talented than the dozens of artists playing his songs in Nashville every night? 

Probably not. 

The difference comes down to who controls the product. In Bryan’s case, he owns the music and the personal brand he has created to perform it. The cover artist is just reselling his stuff.

The Value Of Your Brand

The music business can be a helpful analogy in explaining why creating a unique brand is such a big contributor to the value of your company. Acquirers want what they could not easily copy. If you’re reselling other people’s products and services, an acquirer will likely argue that there are probably dozens of competitors driving down your margin next to nothing. Further, they may even conclude that they too could earn a license to resell whatever you’re distributing and will, therefore, place little value in the company you’ve built. 

However, if you have something exclusive – a unique product or brand that makes people believe what you do is different – an acquirer will pay more, arguing it is difficult to reproduce what you have created. 

If you find yourself reselling other people’s products or services, you can still drive up the value of your business by creating a brand around the way you do it. You could argue that Peloton is just selling a stationary bike. Still, it is the unique company they have created around the bike –including the community of riders that subscribe – that has recently driven Peloton’s value north of $7 billion (almost eight times trailing twelve months revenue at the time of their recent Initial Public Offering).

To drive up the value of your company, own the stuff you sell. If that’s not possible, create a unique brand that makes consumers feel as if you do. 

[1]

http://www.nashcountrydaily.com/2018/08/14/forbes-list-of-the-highest-paid-country-stars-of-2018-includes-luke-bryan-garth-brooks-kenny-chesney-more/